With an aim to deepen commodity derivatives market, regulator Sebi is working on new products that can have good liquidity while weeding out some existing contracts with limited or no appeal among investors and only being used for purely-speculative activities.
However, any new product on agriculture commodities is unlikely for now amid concerns that any such move may be seen as worsening the prevailing price-rise situation because of commodities trading being largely seen as speculative in nature, a senior official said.
Sebi is of the view that only those products can be allowed where there is evidence of significant liquidity, so that speculative trades do not become the driving force behind the price movements.
An advisory committee of Sebi on commodity derivatives is looking into all these aspects, including steps required to be taken to improve transparency and increase liquidity in the commodity derivative markets.
However, the immediate target is to improve the risk management systems of the commodities derivative market to ensure that the instances like problems in trading of castorseed and the NSEL-type crisis situations do not recur.
The Securities and Exchange Board of India (Sebi) has given itself a target to launch new products like options contracts and some index-based products by the end of the current fiscal.
The new products being considered include weather-based derivative, a financial instrument for managing this risk in the agricultural sector, while new contracts in agricultural commodities will have to wait, sources said.
At present, only futures contracts are allowed in the commodity derivatives trading space.
Regarding the existing products with less or no liquidity, the exchanges would be asked to either take immediate steps to improve the liquidity or delist them.
Last month, Sebi chief U K Sinha had said that for now stock exchanges are also not being allowed to start their own commodity derivatives trading platforms as Sebi's first focus is on strengthening the risk management framework for this entire marketplace.
"We are working on that and once we are comfortable. But some time does not mean few years, but may be just a few months," he had said.
Entry of new participants like banks and insurers may also take some time as there are other regulators involved and even foreign portfolio investors (FPIs) cannot be allowed before domestic institutions are brought in.
On new products, Sinha had said a product must have potential for enough liquidity to be allowed but all the aspects are being looked into by a Task Force, headed by NITI Aayog Member Ramesh Chand.
"Allowing banks and financial institutions is also under consideration. We are also looking at how to improve participation of hedgers. For banks and insurers, other regulators would first need to give approvals and we will allow FPIs also only after domestic institutions are permitted," according to Sebi's Whole Time Member Rajeev Agarwal.
